Georgia Will Soon Decide Controversial 'Lawsuit Lending' Topic

A pedestrian passes by the Georgia Supreme Court. The justices agreed Tuesday to take up an appeal that questions whether litigation finance companies are violating state usury laws. (AP Photo/David Goldman)

Questions over the future of litigation funding await answers in Georgia as the state Supreme Court prepares to decide the issue and another case continues to move through a federal court in the state.

On Feb. 6, the state Supreme Court granted review inCherokee Funding, LLC v. Ruth, a lawsuit that asks whether rates charged by those who fund lawsuits are in excess of laws governing interest rates - and whether those rates are interest rates at all.

Critics call these businesses "lawsuit lenders," pointing to the high percentage plaintiffs are obligated to pay when a lawsuit is completed. The industry objects to the term, saying the agreements aren't loans because the company recovers nothing if the plaintiff recovers nothing.

The Georgia Court of Appeals inRuth decided last year that properly labeled legal funding transactions were "investments" rather than "loans." As such, any interest rate laws are not applicable.

"A plain reading of the quoted portion of the funding agreements demonstrates that the use of the phrase 'shall receive nothing' in conjunction with 'no associated obligation to pay' means that the requirement of repayment is completely contingent upon the recovery of proceeds from the related legal claims,"the Court of Appeals wrote.

"Stated another way, if the Plaintiffs had not prevailed in their personal injury litigation, the Defendants would have received nothing."

The state Chamber of Commerce filed a writ asking the state Supreme Court to review that decision. Plaintiffs Ronald Ruth and Kimberly Oglesby followed that up with a Jan. 3 filing request.

They argued that applying the Payday Lending Act and its predecessor sister act, the Georgia Industrial Loan Act, "to litigation loans would not prohibit all such loans."

"It would bar only those loans containing certain charges, rates, penalties, and other fees that the Georgia Assembly has already deemed unfair and usurious," the plaintiffs argued.

They argue that regulation of litigation funding is in the public good, and therefore can be decided in the courts and not left to the legislature.

They also cited a 2015 decision by the Colorado Supreme Court, which agreed with the state Attorney General’s Office that the agreements are, in fact, loans, leading to asettlement of more than $2 million.

The South Carolina Department of Consumer Affairs had reacheda similar decision in 2014, while Oklahoma, Tennessee, Arkansas and Indiana have all passed laws regulating the industry.

Recently, New York Attorney General Eric Schneiderman and the Consumer Financial Protection Bureau brought suit against RD Legal Funding over its agreements with 9/11 first responders and former NFL players.

Meanwhile, in the Georgia federal court case brought as a class action against Oasis Legal Finance, Judge Dudley Bowen has dismissed one element of the lawsuit, and two other counts remain to be decided - including whether Oasis violated the state's Payday Lending Act.

The suit was filed by individuals who accused Oasis, a Chicago-headquartered firm, of charging extortionate interest rates of more than 100 percent on lump sums to pay for living and other expenses prior to settlements.

Lawyers for both the plaintiffs and the defendant did not respond to requests for comment.

But Mary Terzino, a Michigan-based lawyer who has studied litigation and legal funding for some years, said, "I think that as a matter of public policy, lawsuit lending often results in usurious loans."

"This shows where legislation is needed as it was passed in some five other states that holds those lenders in terms of interest rates," Terzino toldLegal Newsline. Terzino is a consultant with the U.S. Chamber Institute for Legal Reform, which ownsLegal Newsline.

She added, "There are a few examples of people ending up owing money to the lender following settlement. But it is hard to know how many as most cases do not go to court."

Lizzie Davis' class action was moved from state court to the U.S. District Court for the Southern District of Georgia, Dublin Division, after it was filed.

In November, Bowen dismissed one count accusing Oasis of usury under the penal code, agreeing with the defendants that it was a criminal statute and so there was no private right of action under the law.

But in the ruling, the judge did not decide several other issues in Oasis' favor.

Bowen did not dismiss alleged breaches of the state Payday Lending Act (PLA), which includes provisions designed to protect consumers against usury.

He also did not strike class action claims or comply with a request by Oasis for a change of venue to Cook County Circuit Court in Chicago.

On Dec. 29, Oasis filed its answer to the first amended complaint. A month earlier, it filed an appeal with the U.S. Court of Appeals for the 11th Circuit on Nov. 28 that claims its agreements with customers include a provision that prohibits them from filing class actions.

It also claims a forum selection clause requires disputes to be brought in Cook County.

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